Collaboration and Merger Options for Nonprofits

The number of nonprofits in the United States continues to grow at a more rapid pace than business. While this may mean that even more needs are being met, it also means that the nonprofit world is becoming more crowded, and access to funding is becoming even more competitive. Nonprofits tend to be collaborative in nature, but the new funding climate and organizations’ desires to better serve their constituents is leading to an unprecedented number of formal collaborations. This resource will review different types of collaboration, from informal to formal and will also discuss times when a nonprofit might consider merging with another.

The Environment

In the past decade, the number of nonprofits has increased by 23.6%, far surpassing the growth of corporations or government entities^[1]. On average, twenty-two percent of funds that nonprofits receive come through charitable donations from individuals, corporations and foundations, but this giving fell by 10% between 2005-2011 when adjusted for inflation^[2]. Simply stated, there are more nonprofits and fewer funds.

Funders have historically encouraged collaboration among nonprofits. Increasingly, however, funders – especially foundations – want nonprofits to focus on “economizing and streamlining service delivery and preventing struggles for available funds”^[3] Because of this and the current funding environment, nonprofits are increasingly willing to consider collaboration, sharing of back-office functions, or even mergers.

Forms of Collaboration

At its core, collaboration is a simple sharing of resources and can include making joint purchases of products (such as a food for a program or office supplies), sharing training expenses for staff, or joining together to support a common cause.

Options for collaboration are expanding and can be a key way for your organization to save money, increase efficiencies, and gain additional visibility. It can be helpful to think of collaborations as being on a spectrum, with informal partnerships that are not legally binding and do not require significant organizational integration on one end and mergers, which require the legal consolidation and complete integration of organization on the other end.

Joint programming and administrative consolidation are the next step on the continuum from an informal collaboration to a legally binding agreement. These initiatives will require more time and a broader integration of programs and services between two or more organizations. In both of these instances, organizations will work together for a common purpose. For example, a child care facility may partner with a local museum to provide an arts-based curriculum. On the administrative side, several nonprofits may decide to share one accountant or HR director and therefore save money by not having to fully staff their program.

Next on the spectrum are collaborations that require legal agreements and the creation of a new entity. If an administrative consolidation is working well, organizations may want to consider establishing a Management Service Organization (MSO), which is a separate entity that is designed exclusively to provide back-office or administrative functions to a group of nonprofits. While there is work involved in establishing the MSO, it can maximize efficiencies and help organizations save money by sharing a common administrative support platform. Along the same lines, a strategic alliance is a more formal agreement to unite programs and decrease costs while still allowing the organizations to maintain their organizational independence.

Near the end of the spectrum, a Joint Venture is completed when two or more organizations form a separate legal entity to pursue a new initiative. An example would be two schools coming together to start a third school (a new nonprofit) in a different area. Finally, a merger is the end of the spectrum and is the complete consolidation of two organizations.

Collaborations take many forms and are often a good way for your organization to save funds by operating more efficiently. If your organization is considering merging with another entity, a first step can be to collaborate at a lesser level to determine if a legal consolidation is going to be most effective.

Merging

Mergers are common in the for-profit world and are often completed so that a company can quickly increase its scope or scale of services. Mergers are increasing in the nonprofit/NGO sector, and more organizations are considering the possibility. A merger in the nonprofit world is defined as the fusing of boards, management, and legal entities to form a single organization.^[4] In general, a merger of nonprofit organizations is either an absorption, in which one organization dissolves and is assimilated within another, or an equal status merger, in which two or more entities dissolve to form a new structure that integrates the full programs of the organizations.

Nonprofits typically consider a merger when they have reached a “tipping point” or critical event. This may include a significant decrease in funding, the loss of a programming facility, or even a change in demographics of the clientele. Mergers are also encouraged by some funders, who believe that two or more organizations combining forces will be able to operate more efficiently and increase fundraising power. However, recent studies have indicated that while mergers typically do result in the provision of better or expanded service, they do not necessarily result in increased efficiencies, and fundraising gains are only seen after short-term losses. As a result, mergers should not be a response to a crisis but rather part of a strategic plan. Key reasons to consider a merger include:

1. Growth strategy: by merging, an organization may be able to serve even more constituents by entering new markets or expanding its market share. In addition, with access to different resources, an organization may also be able to diversify program offerings.
2. Consolidation: if you are in a service market where there are many small players, it may make sense to consider merging with one or more organizations that will allow you to maximize efficiencies and broaden your market presence.
3. Compatibility of mission: can you better fulfill your mission if you merge with another organization? Does another organization provide complimentary services or have permanent facilities that would help your organization achieve its mission? Successful mergers occur most frequently when the merging organization’s missions are compatible and a shared vision for the future can be created.

In short, think strategically about whether or not a merger will help you accomplish your mission in the long-term, not whether it will help you out of a current financial crisis.

Challenges of Collaboration

While there are many benefits of collaboration, it is important to note that there will also be challenges. First and foremost, any type of collaboration means that the collaborating organization is losing some control. If an organization is sharing space, they will no longer have full control over its use. If an agency is sharing staff, they may need to adapt to the other organization’s culture and norms as they pertain to staff performance. The ultimate loss of control occurs in a merger, when one organization essentially takes over another. This loss of control and identity at any level can be difficult for leadership, staff, volunteers and donors.

One of the best ways to overcome the challenges of collaboration is to communicate clearly and consistently about the plans for collaboration, the expectations, and the anticipated outcomes. By sharing this vision with all stakeholders, including staff, board members, donors and program participants, the organization can prepare for change and can pursue a meaningful collaboration that is supported by its constituents.

Conclusion

Collaboration in any form can be a challenge. However, when collaboration is done with the vision of better meeting the needs of clients, program participants and communities, the benefits often outweigh the challenges. When done successfully, collaboration can improve efficiencies, save costs, and strengthen programs.

Additional Resources

1. The Foundation Center hosts an excellent library of articles, sample agreements and other resources that pertain to various forms of collaboration: http://foundationcenter.org/gainknowledge/collaboration
2. The Center for Nonprofit Excellence also lists several resources, including templates for collaborative agreements: http://www.thecne.org/tools-collaboration

[1] Roeger, K.L., Blackwood, A.S. & Pettijohn, S.L. (2012). The Nonprofit Almanac. [e-book]. Retrieved from http://nccsdataweb.urban.org/NCCS/extracts/nonprofitalmanacflyerpdf.pdf

[2] Has America’s Charitable Giving Climbed Out of its Great Recession-fueled Trough?  (2012, June 19). School of Philanthropy News. Retrieved from http://www.philanthropy.iupui.edu/news/article/has-americas-charitable-giving-climbed-out-of-its-great-recession-fueled-trough

[3] Toepler, S., Seitchek, C., & Cameron, T. (2004). Small Organization Mergers in Arts and Humanities. Nonprofit Management & Leadership, 15(1), 95-115.

[4] La Piana, D. (2010). Merging Wisely. Stanford Social Innovation Review, 8(2), 28-33.

For more information, please visit the Giersch Group at www.gierschgroup.com or contact us at prosper@gierschgroup.com.